FAQ Topics

Retirement

401(k)

What is a 401(k) plan and how does it work?

A 401(k) plan is designed to help eligible employees build income for the future through tax-advantaged savings. Money you contribute on a before-tax (pre-tax) basis reduces your current income tax bill. You postpone tax on all the money in your 401(k) plan account while it remains in the plan. Later, when you receive a withdrawal or distribution of your plan money, you pay income tax on any money that has not yet been taxed. 401(k) plan is named after Internal Revenue Code Section 401(k) that makes this type of saving possible.

What are before-tax (pre-tax) contributions?

Saving under the 401(k) plan with pre-tax contributions reduces your current taxable income. Contributions are taken from your pay before federal income taxes are deducted. In most areas, your contribution is made before state and local taxes are deducted as well. This reduces your current tax bill and puts more money to work for you in the plan earning investment return. Let's say you earn $1,000. If you contribute it to the 401(k) plan, your employer puts $1,000 in the plan for you before income taxes are deducted. If you want to contribute that same $1,000 to a regular savings account at a bank, your employer would first deduct taxes - let's say 30%. That leaves you only $700 to put in your savings account. So, if you contribute $1,000 to the 401(k) plan, that reduces your current taxable income for the year by $1,000. If you're in a 28% tax bracket, your current federal income tax savings on that $1,000 alone would be $280.

What is tax deferral?

With a 401(k) plan, your pre-tax contributions, any company matching contributions and all investment earnings are not taxed as current income. You defer, or postpone, federal income tax on these amounts until later - when you take them out of the plan.

What is a company matching contribution?

Some employers - by no means all - provide a matching contribution to the 401(k) plan. With a company matching contribution, the employer contributes a percentage of the eligible compensation you contribute to the plan. You must contribute to the plan to receive matching contributions. If your contributions stop for any reason, so do company matching contributions.

What is a variable company matching contribution?

With some plans that have company matching contributions, part or all of company matching contributions are tied to company performance. Here's the concept: with a variable match, your efforts for the company pool with the hard work of others and may pay off with added contributions to your account. The company's board of directors sets the amount of variable company match based on company financial performance.

How do I decide how much to contribute?

How much you contribute is completely up to you. Some people save the maximum to build their future financial security and to take advantage of the tax savings. If their plans feature company matching contributions, many people contribute at least the amount required to receive the maximum match.

Can I change the amount I contribute?

Yes. Your plan allows periodic changes in the amount you contribute.

Are there limits on the amount I can contribute?

401(k) plans have a minimum amount you can contribute as well as a maximum you can contribute. The plan maximum may be the same as or less than the IRS maximum on 401(k) plan contributions The following IRS rules and regulations govern the amount contributed to the 401(k) plan: annual dollar limit on the pre-tax contributions ($13,000 in 2004; up from $12,000 in 2003). Your plan maximum may be less annual limit on the pay used to determine contributions ($205,000 in 2004; up from $200,000 in 2003) annual limit on total contributions to your account (the lesser of $41,000 or 100% of your pay for most plans in 2004, up from $40,000 in 2003) The requirement that employees at all levels of a company have the same opportunity to save through the 401(k) plan. This can affect the amount highly compensated employees can contribute to the plan.

Are 401(k) plan savings insured?

Those who manage the plan, called the plan fiduciaries, must operate the plan in the best interests of participants and beneficiaries. However, your savings are not insured by the same insurance that applies to banks under the FDIC, or savings and loans under the FSLIC. As a "defined contribution" plan, 401(k) plan benefits are also not insured by the Pension Benefit Guaranty Corporation (PBGC) as are some benefits promised under a "defined benefit" plan.

My company offers "investment options" and I choose how my money is invested. How do I choose which investments are right for me?

Many 401(k) plans offer a choice of professionally managed investment funds with varying levels of risk and potential for return. You may invest your plan money in one or more of the available funds. You choose the investment mix that's right for you is true with similar investments outside the 401(k) plan, the value of many investments will fluctuate in response to changing market conditions. Historically, funds that have fluctuated more in value (had greater investment risk) have also provided returns that did a better job of outpacing inflation (had lower inflation risk). You need to weigh your investment objectives against those of each fund. Past performance is no guarantee of future results.

Can I change my investments?

You can change your investment percentages for your future contributions as well as for the money already in your account.

What is vesting?

Vesting refers to earning a permanent right to any company matching contributions and investment earnings on those contributions. You are always 100% vested in your own contributions to the plan as well as investment return on those contributions. If your employer contributes to the plan, a vesting schedule may apply to those contributions and their investment earnings. With a vesting schedule, you earn vesting in your company matching contribution account as you perform eligible vesting service for the company. As long as you are earning eligible service, you will continue to earn vesting service even if you are not contributing to the plan.

Can I get my money out of the plan while I'm still working?

The IRS allows a few ways to access 401(k) plan money. Your plan may allow any or all of them Plan loans. The IRS allows you to borrow from your account: generally up to the lesser of 50% of your vested balance or $50,000. You continue to postpone income taxes on the amount you borrow as long as you repay the loan as promised. Hardship withdrawals. You may be allowed to withdraw part of your account in the event of certain forms of financial hardship. You will have to pay taxes on the money you withdraw, including a 10% penalty tax if you withdraw money before you reach age 59-1/2. You may only withdraw your pre-tax contributions if you are undergoing the following financial hardships: o College tuition for you, your spouse, or your dependents, o Extraordinary legal expenses, o Funeral expenses for your immediate family, o Severe, uninsured medical expenses for you, your spouse, or your dependents, o To prevent foreclosure on, or eviction from, your primary home or residence, o To purchase your primary residence (not including mortgage payments), or o To repair or renovate your home due to a fire, natural disaster, or similar unforeseeable event.

How are plan expenses paid?

Administrative fees related to the cost of operating your plan may be charged to the investment funds in which your account is invested or deducted from your account. For more information on these fees, contact the plan administrator.

How is my money paid to me when I stop working for my employer?

When you stop working, you may receive the part of your account balance in which you are vested (have full ownership). If the value of your vested account balance is below a certain amount (generally $5,000 or less) your vested account balance will automatically be paid to you in a lump sum. If your vested account balance is above the limit, your benefit will be paid according to your plan rules. It may be paid in a lump sum, or different payout options may be offered to you Payment may be made directly to you. Or, if you wish, you may have any part of the payment that is eligible for rollover paid directly to an IRA or another employer's qualified plan that accepts rollovers.

When do my contributions stop?

Your contributions stop when you elect to discontinue them. Contributions also stop if You stop working for your employer Your employment status changes so you are no longer eligible for the plan You take an unpaid leave of absence Your contributions reach the applicable maximum limit (either the plan's limit or IRS limits).

Do I name a beneficiary to receive my 401(k) money if I die while my money remains in the plan?

Yes. You may name an individual(s), a trust, an estate or a charity. However, if you're married, your spouse is automatically your sole and primary beneficiary. If you want to name someone other than your spouse as your sole, primary beneficiary, have your spouse sign the appropriate place on the form in the presence of a plan representative or notary public.

Can I name a different beneficiary (other than my spouse) if I get divorced?

You can always name a different beneficiary if your spouse provides written, notarized consent. If you get divorced, you may name someone other than your former spouse as your primary beneficiary unless there is a Qualified Domestic Relations Order (QDRO) from a court requiring benefits to be paid to your former spouse.

How do I make 401(k) contributions?

Your employer automatically deducts the amount you wish to contribute from your paycheck and automatically deposits it in your 401(k) plan account.

What taxes will I owe when I receive my 401(k) plan money?

When you receive your 401(k) plan money, either as a withdrawal or as a distribution after you stop working for the company, you must pay federal income taxes on the following amounts. Depending on where you live, you may also owe state and local taxes on your distribution.

Where can I get more information about the tax treatment of distributions from qualified retirement plans like my 401(k) plan?

You can find more information on the tax-qualified retirement plan payments in these IRS publications IRS Publication 575, Pension and Annuity Income IRS Publication 590, Individual Retirement Arrangements IRS Form 5329 which addresses the 10% penalty tax for premature distributions IRS Form 4972 which addresses special tax treatment for lump sum distributions You can get these publications online at , from your local IRS office, or you may call 1-800-TAX-FORM.

What happens when I reach age 70-1/2?

The IRS has special requirements that kick in on the April 1 after the end of the year in which you reach age 70-1/2 If you have already stopped working for your employer, you must begin receiving certain minimum payments from the plan. (The IRS will not allow you to postpone tax forever.) If you are still an active participant working for the employer at this point, your plan may or may not require you to begin receiving minimum payments before you stop working. Be sure to check to avoid any penalty taxes.

How does saving before-tax compare to saving after-tax?

Let's compare the advantages of saving with pre-tax or after-tax dollars. If your plan allows you to make both pre-tax and after-tax contributions, you can make either type of contribution through the plan. If your plan only allows pre-tax contributions - and this is true for many plans - use this chart to compare saving through the plan (pre-tax) or through a regular after-tax investment account such as at your bank or savings and loan Key Features of Your Contributions and Investment Earnings Pre-Tax Contributions After-Tax Contributions Your contributions: Lower your current taxable income for federal income tax, May lower your current taxable income for state and local tax (depending on where you live), and May lower your current tax bracket. Yes No Your contributions are subject to income tax before being deducted from your paycheck No Yes Your contributions are subject to FICA taxes (Social Security and Medicare) before being deducted from your paycheck Yes Yes Your investment earnings are tax-deferred as long as they remain in the 401(k) plan Yes Yes for 401(k); no for bank Your investment earnings are taxable when paid out Yes Yes Your contributions are subject to income tax when paid out Yes No Your contributions are limited by the IRS and the 401(k) plan Yes Yes for 401(k); no for bank Plan may restrict withdrawals before age 59-1/2; tax penalty may apply on such withdrawals Yes No

I'm young. Why start saving now?

You're never too young to save, whether through the 401(k) plan or some other means of saving. The sooner you start, the longer you have to put compound investment return to work for you. You can even stop saving and still come out ahead of the person who started saving later For example, let's take a look at Pat and Sam. Each earns a flat 8% annual return the entire time their money is invested. The employer does not make matching contributions. Of course, your investment results will be different. But this example gives you an idea of the difference starting early can make. Pat starts saving $1,000 a year from ages 25 through 35, then increases to $2,000 a year from ages 35 to 45. Pat stops saving at age 45 but leaves the money in the 401(k) plan to earn investment return. At age 65, Pat has $280,800. Sam starts saving much later, but on the same pattern. Sam saves $1,000 a year from ages 45 to 55 and $2,000 a year from ages 55 to 65. Same dollar amount contributed over the same 20 years, but at age 65, Sam has only $60,200! The Power of Starting Early.

Traditional Pension

What happens if I return to work after starting my pension?

Many pension plans stop or "suspend" benefits while you are working, then resume benefits again when you stop working.

Why does my plan offset benefits by the amount I am expected to receive from Social Security?

Your pension plan was designed to supplement the retirement income from Social Security to provide a meaningful benefit to you. Both you and the company contribute towards your Social Security benefits in the form of Social Security taxes. For this reason, your Social Security benefit amount is factored into the calculation of your pension benefit.

What happens when I reach age 70-1/2?

The IRS has special requirements that kick in on the April 1 after the end of the year in which you reach age 70-1/2. If you have already stopped working for the company, you must begin receiving certain minimum payments from the plan. (The IRS will not allow you to postpone tax indefinitely.) If you are still an active participant working for the company at this point, your plan may or may not require you to begin receiving minimum payments before you stop working. Be sure to check to avoid any penalty taxes.

Where can I get more information about the tax treatment of distributions from qualified retirement plans like my pension plan?

You can find more information on the tax qualified retirement plan payments in these IRS publications IRS Publication 575, Pension and Annuity Income IRS Publication 590, Individual Retirement Arrangements IRS Form 5329 which addresses the 10% penalty tax for premature distributions IRS Form 4972 which addresses special tax treatment for lump sum distributions You can get these publications from your local IRS office, or you may call 1-800-TAX-FORM.

What taxes will I owe when I receive my plan benefits?

When you receive your plan benefits, you must pay income taxes on the part of your benefit from company contributions and any roll-in contributions. You won't owe taxes on the part of your benefit that is based on contributions you made to the plan since you already paid taxes on this money before you put it into the plan. Generally, if you have not yet reached age 59-1/2 when you start your benefit, you will also owe a 10% penalty tax on the distribution.

Can I name a different beneficiary or co-annuitant (other than my spouse) if I get divorced?

You can always name a different beneficiary if your spouse provides written, notarized consent. If you get divorced, you may name someone other than your former spouse unless there is a Qualified Domestic Relations Order (QDRO) from a court requiring benefits to be paid to your former spouse.

Do I name a beneficiary or co-annuitant to receive any death benefits from the plan?

Yes. Plan rules may dictate whom you can name as beneficiary or co-annuitant. If you're married, the plan's automatic form of benefit is a joint and survivor annuity payable to both you and your spouse. If you want to name someone other than your spouse as your sole, primary beneficiary or name a form of benefit other than a joint and survivor annuity, your spouse must consent in writing by signing the appropriate form in the presence of a plan representative or notary public.

What is a qualified pre-retirement survivor annuity?

Under regulations, a defined benefit plan must make a qualified pre-retirement survivor annuity available to any participant who has a vested benefit, and who has been married to an eligible spouse for a year. If the participant dies after earning a vested benefit but before beginning retirement benefits from the plan, the qualified pre-retirement survivor annuity is determined. If the participant has reached the earliest retirement date available under the plan at the time of death, the benefit is figured as if the participant retired early on the day before death, and elected the qualified joint and survivor annuity. If the participant has not reached the earliest retirement date available under the plan at time of death, the benefit is figured as if the participant had terminated right before the actual date of death, then survived to the earliest retirement date under the plan, then elected to retire under the qualified joint and survivor option, and then died. This coverage can be automatic, or particip.

What is an annuity?

An annuity is a stream of income payments, often monthly.

How is my benefit paid to me when I stop working for the company?

When you stop working for the company, you may receive the part of your benefit in which you are vested (have full ownership). If the value of your vested benefit is below a certain amount (generally $5,000 or less), your vested benefit may automatically be paid to you in a lump sum. If your vested benefit is above the limit, your benefit will be paid according to your plan rules. Plan rules will dictate when you can start receiving benefits and any options you have. Many plans offer regular monthly income, with or without guaranteed death benefits. Some plans offer a lump-sum option. If you receive a lump sum, it may be eligible for special tax treatment. Payment may be made directly to you. Or, if you wish, you may have any part of the payment that is eligible for rollover paid directly to an IRA or another employer's qualified plan that accepts rollovers.

How are plan expenses paid?

Administrative fees related to the cost of operating your plan may be charged to plan assets. For more information on these fees, contact the plan administrator.

Can I get money out of the plan while I'm still working?

If your plan accepts employee contributions, your plan may allow you to withdraw these contributions. Be sure to check plan rules carefully. With some plans, if you are less than 50% vested in your benefit, you can lose vesting in your benefit if you withdraw your contributions.

What is vesting?

Vesting refers to earning a permanent right to your benefit from company contributions. If your plan has employee contributions, you are always 100% vested in the part of your benefit from those contributions. A vesting schedule applies to the part of your benefit from company contributions. With a vesting schedule, you earn vesting in your benefit as you perform eligible vesting service for the company.

Do I choose how plan assets are invested?

Unlike a 401(k) plan, you do not need to select investments for your pension plan. The assets in the plan are invested to back the promise to pay plan benefits for all participants. The company (not you) takes the risk of good and bad investment performance. If plan investments do not do well, the company may need to contribute more to the plan.

Is my pension benefit insured?

Because the pension plan is a qualified "defined benefit" plan, your plan is insured by the Pension Benefit Guaranty Corporation (PBGC). The PBGC protects pension benefits when a company terminates a pension plan at a time when the plan does not have enough assets to pay the promised benefits.

How do I make plan contributions?

The company deducts the amount needed from your paycheck and contributes it to the plan.

When do my contributions stop?

Your contributions stop when you elect to discontinue them. Contributions also stop if You stop working for the company Your employment status changes so you are no longer eligible for the plan You take certain leaves of absence Your contributions reach the applicable maximum limit (either the plan's limit or IRS limits).

Can I change the amount I contribute?

Yes. Your plan allows periodic changes in the amount you contribute. There are limits on the amount you can contribute.

What are voluntary contributions?

Voluntary contributions are contributions that you are allowed, but not required, to make to the plan. You may decide to make voluntary contributions for any of the following reasons To increase your retirement plan benefits Because the plan assets are professionally managed Because payroll deductions are a convenient way to save How much you contribute is completely up to you.

What are required contributions?

Required contributions are contributions you must make in order to participate in the plan. You do not earn additional plan benefits for any time period in which you fail to make required contributions.

What is a pension plan and how does it work?

A pension plan is designed to increase the financial security of eligible employees by providing retirement income. You postpone tax on employer contributions to the plan and investment return on plan assets until later, when you begin to receive benefits.

Cash Balance Pension

What happens if I return to work after starting my pension?

Many pension plans stop or "suspend" benefits while you are working, then resume benefits again when you stop working.

What happens when I reach age 70-1/2?

The IRS has special requirements that kick in on the April 1 after the end of the year in which you reach age 70-1/2. If you have already stopped working for the company, you must begin receiving certain minimum payments from the plan. (The IRS will not allow you to postpone tax indefinitely.) If you are still an active participant working for the company at this point, your plan may or may not require you to begin receiving minimum payments before you stop working. Be sure to check to avoid any penalty taxes.

Where can I get more information about the tax treatment of distributions from qualified retirement plans like my pension plan?

You can find more information on the tax qualified retirement plan payments in these IRS publications IRS Publication 575, Pension and Annuity Income IRS Publication 590, Individual Retirement Arrangements IRS Form 5329 which addresses the 10% penalty tax for premature distributions IRS Form 4972 which addresses special tax treatment for lump sum distributions You can get these publications from your local IRS office, or you may call 1-800-TAX-FORM.

What taxes will I owe when I receive my plan benefits?

When you receive your plan benefits, you must pay income taxes on the part of your benefit from company contributions and any roll-in contributions. You won't owe taxes on the part of your benefit that is based on contributions you made to the plan since you already paid taxes on this money before you put it into the plan. Generally, if you have not yet reached age 59-1/2 when you start your benefit, you will also owe a 10% penalty tax on the distribution.

Can I name a different beneficiary or co-annuitant (other than my spouse) if I get divorced?

You can always name a different beneficiary if your spouse provides written, notarized consent. If you get divorced, you may name someone other than your former spouse unless there is a Qualified Domestic Relations Order (QDRO) from a court requiring benefits to be paid to your former spouse.

Do I name a beneficiary or co-annuitant to receive any death benefits from the plan?

Yes. Plan rules may dictate whom you can name as beneficiary or co-annuitant. If you're married, the plan's automatic form of benefit is a joint and survivor annuity payable to both you and your spouse. If you want to name someone other than your spouse as your sole, primary beneficiary or name a form of benefit other than a joint and survivor annuity, your spouse must consent in writing by signing the appropriate form in the presence of a plan representative or notary public.

What is a qualified pre-retirement survivor annuity?

Under regulations, a defined benefit plan must make a qualified pre-retirement survivor annuity available to any participant who has a vested benefit, and who has been married to an eligible spouse for a year. If the participant dies after earning a vested benefit but before beginning retirement benefits from the plan, the qualified pre-retirement survivor annuity is determined. If the participant has reached the earliest retirement date available under the plan at the time of death, the benefit is figured as if the participant retired early on the day before death, and elected the qualified joint and survivor annuity. If the participant has not reached the earliest retirement date available under the plan at time of death, the benefit is figured as if the participant had terminated right before the actual date of death, then survived to the earliest retirement date under the plan, then elected to retire under the qualified joint and survivor option, and then died. This coverage can be automatic, or particip.

What is an annuity?

An annuity is a stream of income payments, often monthly.

How is my benefit paid to me when I stop working for the company?

When you stop working for the company, you may receive the part of your benefit in which you are vested (have full ownership). If the value of your vested benefit is below a certain amount (generally $5,000 or less), your vested benefit may automatically be paid to you in a lump sum. If your vested benefit is above the limit, your benefit will be paid according to your plan rules. Plan rules will dictate when you can start receiving benefits and any options you have. Many plans offer regular monthly income, with or without guaranteed death benefits. Some plans offer a lump-sum option. If you receive a lump sum, it may be eligible for special tax treatment. Payment may be made directly to you. Or, if you wish, you may have any part of the payment that is eligible for rollover paid directly to an IRA or another employer's qualified plan that accepts rollovers.

How are plan expenses paid?

Administrative fees related to the cost of operating your plan may be charged to plan assets. For more information on these fees, contact the plan administrator.

Can I get money out of the plan while I'm still working?

If your plan accepts employee contributions, your plan may allow you to withdraw these contributions. Be sure to check plan rules carefully. With some plans, if you are less than 50% vested in your benefit, you can lose vesting in your benefit if you withdraw your contributions.

What is vesting?

Vesting refers to earning a permanent right to your benefit from company contributions. If your plan has employee contributions, you are always 100% vested in the part of your benefit from those contributions. A vesting schedule applies to the part of your benefit from company contributions. With a vesting schedule, you earn vesting in your benefit as you perform eligible vesting service for the company.

Do I choose how plan assets are invested?

Unlike a 401(k) plan, you do not need to select investments for your pension plan. The assets in the plan are invested to back the promise to pay plan benefits for all participants. The company (not you) takes the risk of good and bad investment performance. If plan investments do not do well, the company may need to contribute more to the plan.

Is my pension benefit insured?

Because the pension plan is a qualified "defined benefit" plan, your plan is insured by the Pension Benefit Guaranty Corporation (PBGC). The PBGC protects pension benefits when a company terminates a pension plan at a time when the plan does not have enough assets to pay the promised benefits.

How do I make plan contributions?

The company deducts the amount needed from your paycheck and contributes it to the plan.

When do my contributions stop?

Your contributions stop when you elect to discontinue them. Contributions also stop if You stop working for the company Your employment status changes so you are no longer eligible for the plan You take certain leaves of absence Your contributions reach the applicable maximum limit (either the plan's limit or IRS limits).

Can I change the amount I contribute?

Yes. Your plan allows periodic changes in the amount you contribute. There are limits on the amount you can contribute.

What are voluntary contributions?

Voluntary contributions are contributions that you are allowed, but not required, to make to the plan. You may decide to make voluntary contributions for any of the following reasons To increase your retirement plan benefits Because the plan assets are professionally managed Because payroll deductions are a convenient way to save How much you contribute is completely up to you.

What are required contributions?

Required contributions are contributions you must make in order to participate in the plan. You do not earn additional plan benefits for any time period in which you fail to make required contributions.

We had a traditional pension plan that was turned into a cash balance plan. What happened to my benefit under the prior plan?

Plans have different ways of accounting for your benefit under the prior plan. Your benefits under the prior plan may Have been converted to a starting balance in your cash balance account Provide a minimum benefit, so your benefits under this plan will never be lower than your prior plan benefits Be replaced by special pay credits provided for your first year of plan participation based on your age at the effective date of this plan May be calculated so you receive the greater of your benefits under this plan or the benefits you would have received under the prior plan had you continued to be covered under that plan May be recalculated using this plan's formula, so you will receive the benefit you would have earned if you had been covered by the cash balance plan during the time you were covered under the prior plan.

What are interest credits?

Interest credits are amounts recorded in your cash balance account each year. Your interest credit for a year equals the amount of your cash balance account at the beginning of the year multiplied by the plan's annual interest crediting rate.

What are benefit credits?

Benefit credits are amounts recorded in your cash balance account each year. A benefit credit can be a flat dollar amount or an amount tied to your pay and/or service. See your benefits summary for details.

What is a cash balance pension plan and how does it work?

A cash balance pension plan is designed to build pension benefits for eligible employees. To make it easy to see the benefit grow, the plan keeps a "cash balance account" that shows the credits employees are eligible for each year. You postpone tax on employer contributions to the plan and investment return on plan assets until later, when you begin to receive benefits.

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